Dennis Y.Wed, Jan 5, 2022 9:43 PM
Crypto Trading ABCs: Cup and Handle Chart Pattern Full Guide
The cup and handle pattern is regularly used for describing trading logic in different types of markets: from stock exchanges to the crypto world. The ability to implement your approach based on this formation will help make your practice more effective.
What is a Cup and Handle: How Exactly Does This Pattern Work?
This striking and unusual (but one of the most discussed) pattern refers to figures that suggest the renewal of a previously blurred trend. It is a figure that appears behind a predefined trend.
The cup is represented as an arc-shaped figure, which really resembles a cavity or reservoir. And the so-called handle represents a slightly downward (or sideways-looking movement) consolidation period.
This figure is a bit more complicated than some other figures, so it is not so easy to define (especially for the newcomers). Many experts think it is a farfetched pattern, which is not very accurate. Many other professionals prove that it is one of the most correct indicators. A kind of holy war, like Microsoft vs. Apple, Linux vs. Windows vs. Mac, etc. And so more so since it is extremely debated, it is necessary to know its main features.
Below is a fairly straightforward guide to recognizing the signs of pattern of a cup and handle:
- It is necessary to first qualitatively trace and specify the preceding uptrend (e.g. with MAs). This can often be seen visually. Especially on larger timeframes (whereas on 5/15/30-minute ones, the trend may be hidden behind local chaos).
- The correct figure is smoother, without any abrupt "corners" (otherwise the quick drops/jumps do not play in favor of working out of the formation). And the upper points on both sides of the pattern should be at approximately the same level. Not 100% necessary, but desirable.
- The handle reflects the consolidation of the analyzed asset. And you should pay attention that in this case there will be a kind of figure inside the figure. For example, as a rule, this element may resemble a well-known "flag". In most cases, it will have a moderately defined lowering tendency, but in some cases, the consolidation may occur in a relatively horizontal lateral mode.
- Breaking can occur in several ways. Mostly it depends on the aggressiveness of your approach (that is, how much you balance profit and potential risk when choosing to start). Some people pay attention to the zone of resistance, labeled as a horizontal line drawn from the left top point of the cup to the right one. If this line is overcome, a breakout is established. Other experts pay attention to breaking the trend line of the so-called "handle" element of the pattern.
- The cup repeats the previous move by about a third. Just at this period, it already looks like a cup. Especially if you have previously trained yourself by looking at similar formations on already established formations and sets.
- After the pattern is fully shown up, the price pulls forward to about the next third of that imaginary cup (graphically it moves from left to right), forming an element of handle.
- The handle element of the pattern is a relatively quick phase of consolidation (if you compare it to the whole duration of the main "vessel" figure).
- The figure is finished if the asset's price exits this consolidation, breaking out in the further direction of the figure.
Unexpected events can dramatically and strongly change the path of the moving (negative or positive news, a hack or compromise of the system in which the asset worked) or other strong factors. If it happens, we are talking about the cancellation of the scenario, and it is risky to count on the restoration of the figure and the resumption of the previous direction from the place where it was interrupted.
Reverse cup and handle pattern
If we find this figure, we estimate the chances of returning to the previous fall. Basically, this formation is just like the regular one, but just inverted.
That's why all the movements, trends, elements, and conclusions are interpreted the other way around.
The rules of recognition, by which the Cup and Handle Pattern can be uncovered, are pretty clear.
Let's review and emphasize key conclusions about that:
- An increasing trend before this figure (or a declining chart for the reverted one) should be determined. A figure like this indicates getting back to the previous main trend, so look for it only on the charts which are exactly fit this main trend.
- Consider only large timeframes (at least, 4H).
- The deepness of the main "vessel" of the figure normally is not too big (70%-90% of the previous trend is not relevant to this formation). The cup represents a complex correction in which the trend has entered. If the correction is too substantial, we can find scenario cancellation.
- Make sure the handle element of the figure is less than 50% of the main "vessel" depth.
How to identify Cup and Handle Pattern and Trade Based on it (with two examples)
Watch the trading volumes spikes as one of the essential criteria for determining this figure. At the beginning of the correction, they fall and then grow as they approach the resistance zone. The activity is increasing. This is also.
Also pay attention to more traditional signs of a breakout, such as strong impulse penetration of a resistance level.
It is not uncommon to select two potential opportunities to open a position:
- When tracking an activity inside a channel (the same channel that is then recognized as a flag), we look at the behavior of the price when it reaches the upper boundary. If it breaks through, and we see an increase in volumes, we may consider this as the first opportunity to start the trade.
- The second possibility is to delay the start until the price breaks the resistance zone drawn on the top limits of the main "vessel" of the figure. Yes, you will miss the upward price move a bit, but you can make sure that the impulse breakout was not false.
If the resistance lines set between the maximums of the flanks of the figure and the "handle" element in the channel overlap, you have only one point for opening the position. Since a bullish of these 2 levels will occur simultaneously.
The Cup and Handle Pattern is a well-known figure, and it's quite discussable. But in the opinion of many experts, it is one of the most reliable.
With more experience, you will be able to search and find it easily. But in any case, consider all the risks!
Is cup and handle a bullish pattern?
If it is not an inverted figure and occurs exactly on an uptrend, then yes.
How reliable is cup and handle pattern?
There is much debate about this pattern. Some analysts believe it is a made-up pattern, while other experts consider it to be one of the most reliable. In any case, it is useful to learn to recognize it and use it in the analysis as one of the variants of events.
What happens after a cup and handle pattern?
If this figure is not discontinued but evolves to its full extent, then it concludes with the reopening of the preceding trend.
Is cup and handle pattern bearish?
If it is a reverse figure and it emerges precisely on a downtrend, then yes, it probably will continue this movement afterward.
Does cup and handle apply to crypto?
This is a universal figure that has been used for decades to analyze price behavior, and it fits crypto even better than it does a number of other markets.
How often do cup and handles work?
There is no 100% guarantee in the analysis. Everything goes only by the rules of probability. Nevertheless, many experts believe that this figure works in most cases. But be always aware of the risks.